Blockchain -- panacea or bubble?

Blockchain technology is taking the world by storm. From banking to health care, many tout blockchain and the cryptocurrencies it enables as a cure-all. Others think cryptocurrencies, including bitcoin, are heading towards the edge. In between are those who see practical applications of blockchain but caution on addiction to cryptocurrencies like bitcoin. On February 26th at the University of Copenhagen, I made a presentation entitled "Block chain technology -- good, bad, or somewhere in between?" This entry gives you a summary of that talk.

Many of you have heard about "bitcoin" but most of you don't realize that blockchain is what enables bitcoin. I believe the best way to understand blockchain is by analogy. Take the poem by Shel Silverstein entitled "Where The Sidewalk Ends." Here are the first two lines: "There is a place where the sidewalk ends, And before the street begins . . ." Now imagine that you enter into a Google documents session with your best friend to edit the poem. Instead of "ends" in the first sentence, you put "begins." Your friend replaces "before" in the second sentence with "after" and "ends" in place of "begins." These changes are all recorded on Google docs. Both of you can see the changes.

Envision, now, that instead of just you and your friend making changes to the poem, there is a community of millions around the world who are making the changes to the poem. This is what is commonly known in computer software as an "open source" network. Blockchain enables bit coin to work in a similar way. You and your friend do a transaction with bit coin. An idiosyncratic number will represent this transaction. That number is known as a "cryptographic hash." It will then be placed on a block and added to the chain of other blocks. The block chain runs sequentially. So your transaction's hash "777XYZ . . . 1" will be inserted into the next block, and that block will follow hash "777XYZ . . .0." This would be akin to each word you put into the poem above, "begins," "after," "ends," being represented by a hash.

For the poem to rhyme, each word must fit. Similarly, any inserted block that doesn't fit in the chain will change subsequent blocks' hash tags, making the chain resistance to tampering. There are many benefits to block chain. One is that your identity can be represented by a cryptographic hash or signature so as to protect you from hackers. Once your identity is verified, all of your personal information is then erased. In some ways, then, you become a numerical avatar. The benefit of this is that hackers can't get to your personal information, such as your address, because this information isn't stored.

What is more, blockchain can be used in the corporate realm so as to diminish the risk of theft, particularly in the developmental stages of an idea. Imagine Albert Einstein teams up with a slew of scientists all around the world – including you -- to create a medicine. Mr. Einstein is located in Princeton and you are located in Palo Alto. Instead of sending e-mails exchanging versions of the medicine, you can use the chain to exchange hashes of the information more securely. No matter how encrypted e-mails are, they are still relatively easy to hack to those in the hacking community. This example can be extrapolated to wider uses for other contexts in open source collaborations between entities.

There are also many advantages with bitcoin and associated cryptocurrencies. Among others, cryptocurrencies like bitcoin: (1) cut out associated middle men, (2) can reduce the costs associated with asset transfers, (3) can ensure for more confidential transactions, (4) reduce transaction fees, (5) enable greater access to credit around the world, particularly to developing countries, (6) create easier fluidity of international trade, (7) permit greater stewardship over one’s account, (8) are highly adaptable and can be modified for particular transactions, and (9) increase the security of asset transfers given the encryption used. Perhaps that’s why the current value of the bitcoin market is $117 billion.

That being said, unlike actual currencies, there is no centralized regulator of bitcoin given its open sourced nature. This means that the value attributed to bit coin is arbitrary, and there is no floor under which it won't go. Such decentralization and lack of a central regulator can cause it to crash without warning, since bit coin transactions can be fantastical in reality. But nobody would know until it is too late. However, as noted in Forbes, there has been a recent bull market in bitcoin. In fact, 27% of those aged 18-34 prefer bitcoin to traditional investments. While some portray bitcoin as a the haven for criminal activity and explain its rise on such traffic -- but illicit activity still only accounts for 1% of all bitcoin transactions.

Regardless of what one thinks of blockchain and associated cryptocurrencies like bitcoin, they are both going to be here for the foreseeable future. This is especially true as companies like IBM are enter the blockchain and associated crypto marketplace.

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